After another year of tightening credit policies and campaigning for the future of mortgage brokers, non-banks have really stepped up their game
It's also about making sure clients have less to do
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If you’re a mortgage broker you’re probably spending a bit of time wondering how you’re going to breathe some new life into your business. If so, you’re definitely not alone. With the Royal Commission and tightening of credit across the board, brokers have really been up against it and many are looking for new ways to grow their business.
If you’ve been looking for something a little different to add to your product range, private construction finance could be just what you’re looking for.
A world of opportunities in construction finance
When it comes to the banks, getting any loan approved can be tough at the moment. For many brokers, when they hear the word “Construction” they run for cover as they think it will be all too hard, but the good news is with a little knowhow it doesn’t have to be that way.
If brokers are prepared to think outside the box and look at options outside their usual lender base, a whole new world of opportunities are waiting.
Private mortgages have been around for a long-time. With mainstream credit as tough as it is, this type of lending has never been more relevant and useful for brokers.
The problem is few brokers consider a private mortgage option for their clients as they may not have dealt with this type of lending before. I feel now more than ever, every broker should have access to a private mortgage provider as this can often be the difference between writing the loan and losing it.
Understanding private mortgages for construction
While most private mortgages are fairly simple in nature, being a mortgage based on the “as is” value of a property, some private mortgage investors will also support small to medium construction loans. For a borrower who is unable to meet the ever-increasing requirements of the banks, having a broker who is able to offer alternative solutions is critical. The question is, are you one of those brokers?
For those of you that haven’t been involved with construction finance before, the big difference between these loans and a regular mortgage is while the loan to value ratio for a home loan is based on the asset value of an existing property, with a construction loan the loan amount is based on the expected future value of the completed project which is otherwise known as Gross Realisation.
This can sometimes be a challenge as – given the property market can be volatile – there can be risk with basing a loan on a value that will not be realised until the project has been completed in say, 12 to 24 months. Given the risk profile of a construction loan they are typically priced a little higher than a regular mortgage.
With a construction loan the borrower is not given the entire loan amount at settlement, instead it is drawn down at regular stages during the build. For a draw to be made the project must have reached a certain stage which must be independently validated by a Quantity Surveyor and/or Architect.
The good news is a borrower will only have to pay interest on the amount they have drawn down at that time.
Making sure the project is viable
For a broker, assessing if their client will qualify for a private construction loan is quite simple.
Generally, the loan to value ratio for a private construction facility would be limited to 65% of gross realisation. If this figure is enough to cover what might be owing on the land plus the construction element, interest and costs, then you’re off to a good start.
The next part of qualifying for a private construction loan is all about making sure the project is viable, well located and is to be constructed by an experienced builder with a successful track record.
While there are exceptions, owner builders will often not qualify for a private construction loan as often they will have unrealistic expectations around building costs, timelines and lack relevant experience.
One of the real advantages with a private construction loan when compared to a mainstream lender is the borrower/developer will not be asked endless irrelevant questions which is often the case with the banks and the approval process and settlement can take place very quickly.
While the exit strategy of the loan is important, the borrower may not require presales to gain approval which is also another big plus for some.
While not the sole solution to reinvigorate your business, having access to a private mortgage option is a very handy tool to have in your bag and will definitely help you to settle more loans and grow your business in what is a very challenging time for many brokers.
By John Dickinson,
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